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The Australian Tax Office's (ATO) new not-for-profit reporting requirement has taken effect this tax season, leaving some organisations uncertain about their obligations. Designed to give the ATO better oversight on the eligibility of non-charitable not-for-profits with an ABN for tax exemption, this requirement mandates that these organisations submit a "not-for-profit self-review return" to confirm their eligibility to self-assess as income tax-exempt.
This new reporting mechanism was introduced to address a significant gap in the tax system, which previously left the ATO with substantial blind spots. Historically, in Australia, organisations could self-assess their not-for-profit status, claim income tax exemption, and then have no further obligation to interact with the ATO. There was no oversight or measure to ensure that these organisations met the criteria for being classified as not-for-profit or why they were granted tax exemption.
Who has to submit a self-review return?
The new requirement applies only to non-charitable not-for-profits. Any organisations with charitable purposes are automatically exempt from income tax if they are registered with the Australian Charities and not-for-profits Commission (ACNC). This is the only way for charitable organisations to gain exemption from income tax. They cannot self-assess as being exempt from income tax.
This means that any charitable organisation which has not previously registered with the ACNC should seek to do so as a matter of urgency.
The requirement for a self-review return applies to not-for-profits with non-charitable purposes across eight categories of tax-exempt entities:
- community service
- sporting
- cultural
- educational
- health
- employment
- scientific
- resource development
The new reporting requirement provides an opportunity for organisations to ensure they are maintaining good housekeeping practices. The government has established this mechanism to monitor operations and ensure they are consistent with what organisations report to the ATO.
What is the deadline for registration?
The requirement to submit an annual NFP self-review return applies for the year ended 30 June 2024 and any subsequent years, meaning that the first return is due by 31 October 2024.
Organisations have been granted a one year grace period to comply with the new requirements. However, not all non-charitable not-for-profits with an ABN need to worry. The not-for-profit reporting requirement serves as a substitute for a tax return, rather than an additional obligation. It is intended for organisations that are not already part of the tax system. If an organisation is already lodging a tax return, there is no need to comply with this new requirement. This may apply to certain club-based organisations that follow the principle of mutuality, where the organisation is owned by its members rather than by shareholders. These clubs are still required to prepare a tax return.
What information does the new return require?
For those required to submit a not-for-profit self-review return, the task should not be overly burdensome. If it does become onerous, it may indicate an issue that should be addressed sooner rather than later. The return only asks for information that organisations should already have on hand to substantiate their eligibility for an income tax exemption based on their purpose and activities. In theory, it should be straightforward - a good housekeeping exercise to ensure continued exemption.
The return includes three sections: organisational details, which includes a question about estimating the gross revenue range as small, medium, or large; five questions to test eligibility; and a summary and declaration. Several key criteria confirm an organisation’s eligibility, including that its members cannot profit from its operations. Additionally, organisations are expected to have a wind-up clause in their constitution, ensuring that any profits or assets would go to like-minded organisations in the event of dissolution.
As this is information that not-for-profits should have readily available, lodging the return itself should only take about 10 minutes. However, it is important not to assume this is the only requirement for compliance. While completing the return may be quick, organisations must ensure that what they declare is accurate and consistent. Just because something was accurate last year doesn’t mean it remains the same year after year. It is natural for organisations to evolve, and not all of them update their documentation accordingly.
FOR MORE INFORMATION
The ATO is thorough in its checks. It’s crucial for organisations to ensure that the purpose of the organisation as stated in the constitution matches the purpose outlined in financial statements and other documentation. This period is an ideal time for checks and balances.
Organisations should take the time to understand their current status, review their constitution, website, and financials, and make any necessary changes to ensure compliance.
The ATO has provided guidance materials, including a factsheet and frequently asked questions, which are available online. If there is any uncertainty, it is advisable to seek professional advice from your local RSM adviser.
